With a net worth of nearly $150 billion, Gautam Adani is the world’s wealthiest Indian. What’s more impressive is his humble beginnings; he never graduated college, and his father was a small textile merchant. After working as a diamond sorter for Mahendra Brothers, Adani set up his own ventures in the metals, textiles, and agricultural industries. The timing could not have been better, as this was around the time India began opening its economy to the international market.
In 1988, Adani founded Adani Group, originally as a commodity trading firm but it soon grew into a wide array of industries, from port management to renewable energy. As of November 2022, the company had a market capitalization of $280 billion, making it the second-largest firm in India behind Reliance Industries.
Recent weeks, however, have been nothing but ruinous for Adani Group. Intense scrutiny from investors prompted by allegations of financial malpractice threaten to knock the conglomerate empire tumbling down.
Hindenburg Research
To understand the controversy surrounding Adani Group, we must first understand the accuser. Hindenburg Research is not your average investment firm; they conduct and publish detailed investigative reports of suspicious companies and short sell them to profit from the subsequent stock price tank.
One of their biggest hits was Nikola in 2020. Hindenburg called it “an intricate fraud built on dozens of lies,” with the founder Trevor Milton simply lying to investors and the general public in order to boost demand for their stock. For reference, the company was at one point valued more than the Ford Motor Company – despite having no actual revenue. The SEC opened a case, and Trevor Milton was later convicted of wire and securities fraud.
Adani vs Hindenburg
Hindenburg’s latest target is Adani Group. A 2-year investigation led them to believe that Adani engaged in stock manipulation and accounting fraud over the course of decades. Following this report, Adani Group’s value declined by more than $104 billion, so they countered with a 400-page response to Hindenburg’s allegations, which Hindenburg then argued doesn’t address any of the charges.
Adani Group also had a Follow-On Public Offer (FPO) for January 31st. This is when a public company issues shares to investors after their initial public offering (it’s also sometimes called secondary offerings). Adani set a floor price for the offering of 3,112 rupees per share and a price cap of 3,276 rupees per share. Due to market volatility, however, Adani canceled the $2.5 billion FPO, further raising investors’ concerns.
As it stands, Hindenburg dared Adani Group to sue them, as the legal discovery process would give Hindenburg access to internal documents.
The accusations
In their 32,000 word report, Hindenburg Research outlined a long list of accusations and pieces of evidence unraveling a history of financial crime. Even a summary of the charges would be a monumental task, both for us as writers and you as readers (but if you’re really interested, here it is). Instead, here’s some key points to keep in mind:
Members of the Adani family were involved in various illegal activities, especially the diamond trading scam from 2004 to 2006. Despite the Directorate of Revenue Intelligence (an Indian anti-smuggling agency) linking Adani family members to the aforementioned scam, they have been promoted to high-level positions in the company.
Several Adani Group companies, for example, have dealt with Jatin Mehta, a wanted diamond merchant who duped over $1 billion from multiple Indian banks before fleeing the country. Oh and Mehta’s son is also married to Vinod Adani’s daughter.
Vinod Adani (Gautam’s brother) and Subir Mittra (an Adani Group executive) are associated with several businesses in Cyprus, Singapore, and Mauritius, among others – huge tax havens. These companies engaged in transactions with Adani subsidiaries without disclosing their nature. Emerging Market Investment DMCC, for example, a UAE-based corporation owned by Vinod Adani, hardly exists (no listed clients, no serious online presence, etc) and somehow loaned $1 billion to an Adani Power affiliate.
And it’s not just firms related to Adani executives that raise suspicions – Four Adani Group firms lent AdiCorp Enterprises around $87.4 million. The problem is that this kind of money is more than 900 years of Adani Group’s net income in 2020, and the vast majority of these loans were immediately re-lent by AdiCorp back to Adani Power.
Adani Group has also worked extensively with Amicorp Group, a financial and management services company that played a key role in the 1Malaysia Development Berhad scandal. One of the world’s greatest financial scandals, 1MDB had a perfect mix of corruption, bribery and money laundering. 1Malaysia Development Berhad, a Malaysian sovereign wealth fund (a state-owned investment fund), was embezzled of at least $4 billion. Long story short, Malaysia’s Prime Minister at the time, Najib Razak, was convicted of abuse of power, money laundering, and breach of trust. The mastermind behind the whole thing, Jho Low, is now an international fugitive in hiding.
The very fact that Adani willingly associated themselves with a firm involved in corruption this deep is questionable to say the least.
So what now?
There is no doubt that Adani Group’s reputation is irrevocably destroyed. They’re not a particularly well-known company, so being let off the hook won’t change the fact that this controversy is what people will know them for. Thus far, no significant legal action has taken place but that may likely change in the coming weeks.
Because Gautam Adani is seen as a close ally of Indian Prime Minister Narendra Modi, opposition legislators have demanded a full inquiry into the Hindenburg allegations. The federal government commenced a “preliminary review” of Adani Group’s financial statements, and the Securities and Exchange Board of India that it would take appropriate action if any information came to their notice.
Meanwhile, ratings agency Standard and Poor’s reduced its assessment on Adani Ports and Adani Electricity from stable to negative. Investors have grown and will remain extremely distrustful of Amani Group and its affiliates, comprising their ability to raise capital and bounce back from their ravaged financial position.
Econ IRL
The correlation between a country’s wealth and their citizens’ reported happiness is well-documented; richer countries tend to have happier people. Curiously, however, wealthy East Asian countries aren’t as happy as they “should be” based on their wealth. Why is this?
Recognizing the deviation, this week’s paper presents an idea as to why this might be the case. The authors focus specifically on China because unlike Japan, South Korea, Singapore, etc, China varies in the kinds of farming suitable for the land – the southern for rice-farming and the north for wheat-farming.
Similar to the East-West findings, the rice-farming areas in the south report less overall satisfaction in surveys than in northern wheat-farming areas. What is it about rice-farming societies that make people less happy? The authors suspect it has something to do with interdependence – in traditional rice-farming villages, farmers had to rely on each other heavily because of the high labor demands. This leads to interconnections among people which in turns creates a culture of social comparison.
The authors test this hypothesis by comparing the levels of social comparison among villagers in Lianhu (a rice-farming area) and Qukuo (a wheat-farming area). These areas have similar climates, environments, and are both state-owned. Lo and behold, rice farmers reported more social comparison than wheat farmers.
How does this relate to the paper’s original question? Social comparison is never a good thing for overall happiness. Although it helps to compare down a hierarchy, it hurts to compare up. This means that social comparison helps the people on top, resulting in net dissatisfaction.
‘Till next time,
SoBasically